Another post on inequality

April 18, 2011

The case indicting inequality as the root of our economic problems is overwhelming. Inequality is what enables a very small class of elites to accumulate and hoard the purchasing power of society and thereby prevent its needed circulation. Without continuous circulation, society collapses. The moral dilemmas of inequality go even deeper. On what basis should a small minority command production and for who’s benefit?

The statistical data on inequality are well known. The top 1% receive about 21% of total income, the next 19% about 40%, and the bottom 80% of the population only 39%. This means that an upper middle income person has a purchasing power of over four times that of a bottom 80% worker and the lucky person at the top a purchasing power multiple of 43.

Many look at the existence of higher relative incomes as somehow harmless to the lower groups. This is completely untrue as they are fully inter-related. The higher incomes are directly reflected in the price of goods that lower income workers buy or would like to buy. As political philosophers have long noted, relative incomes are nothing other than social relations. A wealthy or upper middle class group cannot exist without an array of low income workers. One side has no meaning without the other.

Economists, without having any training in human psychology and apparently lacking a need to provide empirical evidence, claim income differentials are necessary in order to provide incentives for efficient production. This theory, of course, is extraordinarily well suited to the interests of the top 20% and should therefore be treated with deep skepticism. Most theories on human psychology do not in fact see ever higher monetary rewards as a prime motivator. Security, belongingness, pride in work, community, self actualization, and creativity are normally given far higher place. Richard Layard, in a piece today in the Financial Times entitled “The case against performance-realted pay” provides a very useful perspective on this, and while doing so perhaps unwittingly ends up calling into question the entire foundation of a system based on monetary profit.

…for teamwork jobs, like those in a government department or a large business, there is little evidence that individually-based incentive pay works. Indeed, there is plenty of evidence against it.

In particular such annual fine-tuning brings at least four problems. The first is demoralisation. It is great to be recognised, but hugely discouraging not to be. Research shows that assessment by different assessors often favours different workers – so it is not surprising that feelings of bitter injustice are common. Everyone knows that a system of promotion is essential, but annual performance-related-pay, which grades colleagues into classes, introduces unnecessary tension. Co-operation not competition should be the dominant ethos.

Without performance-related pay, the main motives to work well are the desire to be respected and pride in your job. Advocates of performance-related pay assume that these motives will be unaffected if a third motive is added – the quest for extra pay. But this is wrong. In fact there is good psychological evidence that offering short-term rewards distracts people. These experiments show that short-term rewards are effective for routine work, but not for problem-solving; those paid for getting things right actually do worse than those who are not paid.

Other experiments show that paying people for doing something actually reduces their other motives for doing it – the most famous example being blood donation, which is often found to decline if payment is involved. It is hard for some economists to understand that human nature is more complex than their models. But most people like to feel they are giving of themselves and giving more than is expected.

Even in the private sector there are plenty of successful companies that use no individual incentives at all, and their number is growing.

If we limited the power to accumulate to no more than that of an upper middle income wage, the inequality statistical data would lead us to conclude the purchasing power of the bottom 80% would increase almost 50%. Human psychology studies indicate there is very little, if any, trade-off between income inequality and effort, which should give us reasonable confidence that a fair distribution of wealth will significantly increase prosperity for vast majorities. Those from the right will argue that an individual should be entitled to the fruits of his or her own labor. But that of course is exactly my point.

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Economists should see (but most don’t) that accumulation of assets at the top will necessarily lead to recession/depression. The masses need to have enough purchasing power to satisfy their needs.

It’s like a game of Monopoly where one person accumulates pretty-much all the stuff — everybody else wants to just say “to hell with it” before the game is actually over because they have no way of actually playing. Sure, they can roll the dice and move their top hat or horse around the board, but it gets kind of pointless.

The way you fix this, in Monopoly, is to stop playing, give the “winner” a ribbon and start over.

In the economy, if you are going to maintain the current system, you have to have the government spend money in such a way that the un-rich start to accumulate spending power, or you tax the wealthy to an extent sufficient to make the poor relatively much less poor. Of course, you can do both at once, too, which seems the most expedient and effective way to go – it would be like a do-over in Monopoly.

I agree: “if you are going to maintain the current system, you have to have the government spend money in such a way that the un-rich start to accumulate spending power, or you tax the wealthy to an extent sufficient to make the poor relatively much less poor. Of course, you can do both at once, too, which seems the most expedient and effective way to go”.

The problem is that neither option is being proposed by the mainstream democrats. I guess the system’s not going to be maintained. What happens next?

One thing that could be done is to have the Fed simply write off a few trillion dollars of treasuries. This wouldn’t really do anything, except eliminate all this silly talk of debt ceilings and austerity. It wouldn’t bring any real shifts in income or asset distribution, but perhaps it would postpone things from getting worse as the government could spend on the programs it has in place without talk of reductions and going broke.